ACCT HW6

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Dallas Baptist University *

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2301

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Accounting

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Feb 20, 2024

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Homework 6 Page 1 of 3 ACCT 2301 - Homework 6 1. Company “Y” uses a periodic inventory system. Data for 2021: beginning merchandise inventory (December 31, 2020), 2,000 units at $38; purchases, 8,000 units at $40; expenses (excluding income taxes), $144,500; ending inventory per physical count at December 31, 2021, 1,800 units; sales $8,200 units; sales price per unit, $85; and average income tax rate, 20 percent. Required: Prepare income statements under the FIFO, LIFO, and weighted average costing methods. Required: Between FIFO and LIFO, which method is preferable in terms of (a) net income and (b) income taxes paid (cash flow)? Explain. FIFO is more preferable when it comes to net income because it yields a higher net income since the CGS is lower than LIFO. In terms of income taxes paid, LIFO is more preferable because you are paying less income tax since the pre-tax income is less then FIFO. 2. Explain the difference among FIFO, LIFO, and weighted average costing methods for inventory reporting. Fifo: uses the oldest units acquired as the first units sold. Lifo: Uses the most recently acquired units as those sold first.

Homework 6 Page 2 of 3 Weighted Average: Uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory. Average cost per unit: Costs of goods available for sale divided by number of units available for sale. Note: Writing that FIFO is “first -in-first- out” is not equivalent to explaining. 3. Report the COGS equation. Beginning Inventory + Purchases – Ending Inventory 4. Explain the different implications of using FIFO, LIFO, and weighted average on (i) Beginning Inventory, Ending Inventory, COGS. When costs are rising, LIFO will produce a higher cost of goods sold. Because those more recently acquired items are now costing more to sell. FIFO will produce a higher ending inventory when costs are rising. Since we are selling the oldest acquired items, our ending inventory will be worth much more because of the rise in prices of the newly acquired units. This will directly lead to a higher beginning inventory for the next year. 5. Explain why the reporting standards allow for special cases in inventory reporting and make an example of a special case. They allow for special cases for companies with a low inventory and very valuable items. An example would be the yacht company. They have only 4 units worth 200 million dollars. 6. E xplain what the “Lower of Cost or Market” (LCM) method is and when it is applicable. The LCM is a valuation method stemming from conservatism. It can recognize a loss when replacement cost or net realizable value drops below cost. 7. Redo the LCM exercise reported at the end of the Lecture Notes 6.

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